Although there are now vaccines for the COVID-19 virus, and an end to the virus itself is potentially in sight, entrails of the virus will still be seen in the courts as businesses litigate with their insurers and brokers in an effort to recover for economic losses resulting from shutdowns ordered as a result of the pandemic.  In this issue of The E&O Report, we will review some recent New York court cases addressing these issues that insurance agents and brokers should be aware of.

In December 2020 and January 2021, the Federal District Courts in New York began to address the issue of whether coverage is owed under business interruption coverage and/or civil authority coverage in several cases.  These cases include the following: Michael Cetta, Inc. d/b/a/ Sparks Steak House v Admiral Indem. Co., (a restaurant seeking coverage under Business Interruption and Civil Authority coverages); 10012 Holdings, Inc. v Sentinel Ins. Co., (an art gallery seeking coverage under Business Interruption coverage), Tappo of Buffalo, LLC v Erie Ins. Co., (a restaurant seeking coverage under Income Protection Coverage, Extra Expense Coverage and Civil Authority Coverage); and, Redenburg v Midvale Indem. Co., (a law firm seeking coverage under Business Income, Extra Expense, Extended Business Income and Civil Authority coverages).[1]  

In all of these cases, the insurance policies contained language limiting the business income or business interruption and extra expense coverages to suspension of operations “caused by direct physical loss of or physical damage to property…" (or similar language) and limiting the civil authority coverage to situations where a covered cause of loss “causes damage to property other than property at the" insured premises.  In each of these cases, the courts rejected the insured's arguments and dismissed the claims against the insurers.  In all but the Redenburg case, the decisions were based upon a finding that there was no physical damage and that “loss" does not refer to loss of use of the premises.  In the Tappo case, the court explained that, “[w]hile there is no doubt that COVID-19 and the New York State Executive Orders relating to COVID-19 have had a devastating impact upon the restaurant industry, … [the insureds] cannot plausibly allege that this impact is the result of a direct physical loss of or damage to covered property as required to establish coverage under their insurance policies." 

In the Redenburg case, the court elected not to even reach the issue of whether there was direct physical loss or damage, but instead found that the losses fall within the policy's virus exclusion, which excludes from coverage any “loss or damage caused directly or indirectly by … [a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or diseases … regardless of any other cause or event that contributes concurrently or in any sequence to the loss."  The court rejected the insured's argument that its loss was not caused by COVID-19, but rather, by the Executive Orders which were issued, reasoning that the provision applies to a loss directly or indirectly caused by a virus.  While the Executive Orders “were, in the sequence of causation, one step more proximate" to the losses than the virus itself, the court found that this does not bring the claims outside the exclusion.

When the pandemic first occurred, many people believed that there was the possibility for thousands of E&O lawsuits being commenced against New York insurance agencies and brokerages in connection with COVID-related claims that would be uncovered.  However, thankfully, so far there have been very few.  As of the date of this E&O Report, we are aware of two cases currently pending in New York in which the insureds have sued not only their insurance carriers, but the insurance brokers involved in placing the policies.[2]  In both cases, the insurer, the retail broker and the wholesale broker filed motions to dismiss the complaints.  In each case, the retail broker has raised the same arguments i.e. that the broker procured the requested coverage, that the insured did not have a special relationship with the broker, and that there is no proximate cause either because coverage for the virus is simply unavailable or because the insured in each case received its policy.  We expect that a decision will be issued in at least one of these cases in the near future.    As we learn of any developments concerning these issues that New York insurance agents and brokers should be aware of, we will be sure to provide an update.  

 
Submitted by:

Debra M. Krebs, Esq.
Keidel, Weldon & Cunningham, LLP

[1] Michael Cetta, Inc. d/b/a/ Sparks Steak House v Admiral Indem. Co., 2020 US Dist LEXIS 233419 [SDNY Dec. 11, 2020]; 10012 Holdings, Inc. v Sentinel Ins. Co., 2020 US Dist LEXIS 235565 [SDNY Dec. 15, 2020] ; Tappo of Buffalo, LLC v Erie Ins. Co., 2020 US Dist LEXIS 245436 [WDNY Dec. 29, 2020]; Redenburg v Midvale Indem. Co., 2021 US Dist LEXIS 15434 [SDNY Jan. 27, 2021].

[2] Soundview Cinemas Inc. v Great American Ins. Co. et al., (Nassau County, Index #: 605985/2020); and, JD     Cinemas, Inc. d/b/a Movieland Cinemas 112 v. Northfield Ins. Co., et al., (Suffolk County, Index #: 609919/2020).